The Danger of “One and Done” When Investing for Impact

Do you get the impression that investors only fund one “sector representative” at a time? I’m not an investor or a social entrepreneur, so I have no first hand knowledge of this. But two unrelated conversations with—you guessed it—an investor and a social entrepreneur made me wonder. The social enterprise had developed a great product, but struggled to raise money, perhaps because there were already well-regarded (and well-funded) peers in its sector. In contrast, the funder expressed frustration at the lack of collaboration between nonprofits and social enterprises operating in the same space. From her perspective, redundancy was an issue. While I understand both sides, the “one and done” approach, if it exists, may be problematic.

Really, it gets to the heart of what motivates impact investors. Do they invest in the (perceived best) solution to a problem, or the best mechanism to discover the solution? In the first scenario, the investor assumes that she has (or may have) a viable answer and devotes her efforts to supporting that answer. In the second, the investor gets behind a superior problem-solving approach and a working hypothesis, subject to further testing and experimentation. (You can probably tell that I’ve been reading The Lean Startupby Eric Ries.)

Why does this matter? Because if investors bankroll “the best possible solution”, the focus may be making that particular solution work. From an investment management perspective, this could reduce tolerance for pivots. From a portfolio management perspective, diversifying with other, presumably less promising investments looks a bit foolish. However, if investors support “the best working hypothesis” + “the best discovery mechanism”, there is room for several players in the same sector. In fact, what you have is multiple experiments running simultaneously that provide lots and lots of problem-solving information. If the goal is in fact solving the problem, this approach makes intuitive sense.

Perhaps the state (and utility) of collaboration across the impact investing industry is something else to consider. “One and done” may make sense in the context of a single institution, for a variety of reasons. But it doesn’t across the investing spectrum. The industry as a whole would be better off exploring multiple solutions at the same time. However, this sort of approach would either require lots of luck or lots of coordination. Both seem like wishful thinking at this point. In any case, if coordination is as absent among impact investors as it is among social entrepreneurs, it may be more, not less likely for similar projects to get funded. Or not. It does seem a bit nonsensical to think there is only one winner per category in the real world though. Sigh… Perhaps I should refocus my energy on deciding what movie to rent from redbox.